Tuesday, 16 May 2017

A Main Determinant of Financial Stability Has Turned Volatile

From December 2014 to October 2016 the y/y money supply growth rate for the U.S. experienced a period of unprecedented stability based on data covering the last 28 years. This might very well have contributed to the financial stability also experienced in recent years.

But now the volatility of the money supply growth rate has picked up remarkably in recent months. The question then becomes if recent developments will be a precursor for increased market volatility as well.

Also notice how the 2000 and 2008 financial turmoil were preceded by record-low levels of volatility in the money supply growth rate. Whatever the case may be, one thing is for sure: increased money supply volatility is not ideal for financial markets, especially when it's driven be a declining growth rate as is the case today. 

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